Selling the Family Business: Protecting Directors Who Weren't Business People

The situation

Harpreet built her specialty parts distribution business in Vaughan over twenty-two years, starting with a single delivery van and growing it into a company with a national customer base. She held the large majority of the shares. The rest were split among a handful of extended family members who had bought in or been given shares along the way, most of them uninvolved in day-to-day operations. The company's board, on paper, had three directors: Harpreet, her brother Eitan, and a longtime family friend named Quang. Neither Eitan nor Quang worked in the business. Eitan taught at an elementary school. Quang worked as an insurance adjuster. Both had agreed years earlier to sit on the board mostly as a favour, trusting Harpreet to run things well, and for a long time that trust was enough. Board meetings, when they happened at all, were conversations over dinner rather than formal sessions with an agenda and minutes.

That informality had never mattered until a national competitor approached Harpreet with an offer to buy the company outright, for a price that would eventually land at roughly $22 million. It was a real offer from a serious buyer, and Harpreet wanted to move forward. She came to Treadstone Law to handle the sale. Early in the engagement, our transactional team asked to see the company's minute book, the record of board and shareholder decisions going back over the years. What came back was thin: a handful of resolutions from the company's early days, almost nothing after that. For a sale of this size, that gap was not just an administrative loose end. It was a real exposure for the two directors who had the least reason to expect it.

What the review found

Directors of an Ontario corporation owe legal duties under the Ontario Business Corporations Act: to act honestly and in good faith in the best interests of the corporation, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Those duties apply the same way to a director who spends her days running the company as to a director who spends his days grading spelling tests. Sitting on a board is a legal role, not an honorary one, regardless of how the seat was offered or how casually it has been treated.

The sale created a specific problem. Harpreet was both the majority shareholder selling her stake and a director voting to approve the transaction on behalf of the company, including on behalf of the minority shareholders who were not in the room. She also stood to receive a post-sale consulting arrangement from the buyer that the minority holders would not share in. That combination, a director with a personal stake in the outcome different from the shareholders she represented, is a textbook conflict of interest, and Ontario law does not prohibit it outright. It requires that it be disclosed and managed properly. Left unmanaged, a minority shareholder who later felt shortchanged could argue that the sale process was unfair, that the price undervalued the company, or that the directors had failed their duty of care by rubber-stamping a deal shaped around the majority owner's interests. That kind of claim, known as an oppression remedy application, can be brought against the corporation and, in some circumstances, against the directors personally. Eitan and Quang had signed nothing that made them liable for anything yet, but a poorly documented approval of a $22 million sale, by directors who could not point to any record of having turned their minds to the fairness of the deal, was exactly the fact pattern that makes such a claim viable.

What we did

1. Audited the corporate records before touching the deal. We reviewed the minute book in full, identified the gap in documented board activity, and flagged it to Harpreet as something that needed to be fixed before, not after, the board approved a sale of this size.
2. Named the conflict openly. We advised Harpreet to formally disclose to the board, in writing, that she was both the majority seller and a director voting on the transaction, and that she was being offered a post-closing consulting role by the buyer on terms the other shareholders would not receive. Disclosure is the first step in managing a conflict properly, and it needed to happen before any vote, not as a footnote afterward.
3. Set up a process built around the two outside directors. With the conflict on the table, we recommended that Eitan and Quang, as the directors without a personal stake in the sale price, take the lead in reviewing the transaction's fairness to all shareholders, rather than simply following Harpreet's lead as they always had.
4. Arranged an independent valuation. A sale price agreed between a founder and a buyer is not, on its own, proof of fair value to minority shareholders. We arranged for an independent business valuation of the company, giving the board an objective benchmark against which to assess the buyer's offer, and a document to point to later if the price was ever questioned.
5. Documented every meeting properly from that point forward. Board meetings on the sale were held with a written agenda, recorded minutes, and a clear account of what was discussed, what questions were asked, and what advice the directors relied on. Eitan and Quang's questions, some of them basic, about how the valuation worked and what the consulting arrangement meant for Harpreet, were recorded rather than smoothed over.
6. Confirmed the directors had genuinely independent advice. We made clear to Eitan and Quang that they were entitled to ask questions freely and that their role was to represent the shareholders as a whole, not to defer automatically to the founder who had recruited them to the board.
7. Confirmed the shareholder approvals actually required. We reviewed the company's articles and any shareholder agreement provisions bearing on a change of control, and confirmed that proper notice of the transaction was given to every shareholder, including the family members who held only small stakes.

The outcome

The sale closed roughly five months after the buyer's initial approach, at a final price close to $22 million after negotiations over working capital adjustments and a holdback tied to customer retention. The independent valuation had come in close to the agreed price, which gave the board confidence going into the vote and gave Eitan and Quang, in particular, a defensible basis for approving a transaction neither of them was equipped to price on their own.

About four months after closing, one of the extended family shareholders, who held a small minority stake and had not been actively involved in the process, raised a complaint through a lawyer, alleging that the sale price had undervalued the company and that the process had favoured Harpreet's interests over those of the other shareholders. It was exactly the claim the documented process had been built to withstand. Our team assembled the record: the disclosed conflict, the independent valuation, the minutes showing the outside directors' questions and the board's deliberation, and the shareholder notice that had gone out before the vote. Faced with that record, the shareholder's counsel withdrew the complaint within a few weeks, before any court application was filed. No litigation proceeded, and no director, including Eitan and Quang, faced any personal claim.

Harpreet's takeaway from the experience was not that the sale had been at risk of falling apart. The deal itself had never been in doubt. What had been at risk, without anyone quite realizing it, was two people who had agreed to help a friend and a sibling years earlier being exposed to a shareholder dispute they had no part in creating and no way to see coming. Fixing the governance gap cost time during an already busy sale process, but it turned what could have been a drawn-out and personally stressful dispute into a complaint that never got past a first letter.

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